SCANDALS IN THE CHURCH: THE MONEY; As Lawsuits Spread, Church Faces Questions on Finances

After spending the past six months fending off accusations that it covered up allegations of sexual abuse by priests, the American Roman Catholic church now faces a new wave of scrutiny about how its finances are handled, particularly because of the large and confidential settlements that dioceses have reached with victims of that abuse.

In fact, some big donors to the church are leveling the same sorts of complaints that abuse victims and their supporters have made: that a church run in such secrecy for decades needs to be more open in its decision-making and more accountable for the consequences of those decisions.

Recent reports of accounting cover-ups, most notably in Milwaukee and Palm Beach, Fla., have only drawn more attention to the inability -- or refusal -- of many dioceses to disclose where their money comes from or where it has gone.

Those concerns were evident last weekend in Los Angeles during the annual meeting of Foundations and Donors Interested in Catholic Activities, an umbrella organization representing 47 foundations that give the American Catholic church $200 million a year. Philanthropists and their lawyers and administrators called on the church to issue an audited report on how much money it has spent settling sexual abuse cases in the past two decades.

''The church should open up its books,'' said Erica P. John, an heir to the Miller brewing fortune and president of a family foundation that contributes up to $5 million a year to Catholic causes in Milwaukee.

''The church should not be a secret society,'' Ms. John said. ''We're the people of God, and we want transparency.''

During Saturday's gathering of Foundations and Donors, several foundation presidents expressed disappointment in the United States Conference of Catholic Bishops -- the policy-setting body for the Roman Catholic Church in America -- for not putting financial accountability on the bishops' formal agenda at their meeting that started yesterday in Dallas concerning the sexual abuse crisis.

Francis J. Butler, president of Foundations and Donors, said the group wrote to Bishop Wilton D. Gregory, the president of the bishops' conference, warning that ''the crisis of clergy sexual abuse will have profoundly negative repercussions for Catholic giving in the absence of clear and transparent financial reporting.''

Some experts said that if the church ever opened its books completely, people would be shocked at at how little oversight or control there was over the finances.

A big part of the confusion is that there is no such thing as ''the church,'' financially speaking. The leaders of the 194 dioceses are independent operators as far as money is concerned and have no obligation to make their financial statements public or follow the general rules of accounting.

''I'm constantly amazed by how little information some dioceses have on their finances,'' said Pat Schiltz, dean of the University of St. Thomas Law School in St. Paul and a lawyer who has represented the church against sexual abuse claims. ''They are run like mom-and-pop operations.''

The demands for greater financial accountability and openness come as lawsuits against the dioceses are multiplying.

Since the sexual abuse crisis erupted in January, more than 200 priests across the nation have been removed from ministerial duties. In that time, too, at least 300 civil lawsuits contending sexual abuse by clergy have been filed against the church, according to a recent Associated Press survey.

Plaintiffs' lawyers say scores more are in the pipeline. Last month, the Boston Archdiocese backed out of a proposed settlement with 86 victims of one priest, estimated to cost up to $29.8 million, saying it would have crippled its ability to pay plaintiffs filing new complaints. In Los Angeles, a lawyer who won $5.2 million from the church last year for a single victim said she had signed up 100 new clients in six weeks.

Payments to successful plaintiffs are only one expense the church faces. There are also spiraling lawyers' fees, insurance bills and, since many court-approved settlements call for the church to finance psychological treatment, the costs of treating hundreds of victims. In addition, an increasing number of insurers have balked at paying settlements for ''intentional acts'' of sexual abuse by priests, leaving the dioceses with sole responsibility for paying.

As dioceses exhaust their insurance coverage, they may face the prospect of cutting back on ministerial programs, borrowing from one another, asking parishioners to give more and selling or mortgaging church property -- options faced in the late 1990's by the dioceses in Dallas, Santa Fe, N.M., and Santa Rosa, Calif.

Church officials said that Sunday collection-plate giving in the nation's parishes remains strong. But it is unclear how contributions to bishops' appeals and other fundraising drives have been affected by the scandal, because most dioceses do not release their financial information.

''Some of us feel very embarrassed and stupid for having supported the church for such a long time and never insisted on getting any meaningful data back,'' said James Post, a professor of management at Boston University and an organizer of a Boston lay group seeking such information.

''We found our trust has been betrayed, and not just a little bit, but in such a catastrophic way that we would not come out of this without an insistence on greater public reporting on the financial side of the church.''

Trickle-Up Financing

Unlike unhappy shareholders suing an Enron Corporation or a Global Crossing, people with a grievance against church officials find there is no American Catholic Inc. While the Vatican may rule on theological matters, financially the American church is anything but a top-down operation. Its 194 dioceses operate independent of the Vatican, getting no money from Rome. In fact, the cash goes the other way: American Catholics are collectively the largest financial supporters of the Vatican.

The annual revenues of the nation's 18,500 local parishes total about $7.5 billion, according to Joseph Harris, the financial officer of a Seattle-based charity who studies church finances and has conducted a survey of 3,000 parishes nationwide. Parishes use most of this money to finance local church operations and parish schools, Mr. Harris said.

In addition, the parishes generally give 5 percent to 15 percent of their annual revenues to their diocese. At the diocese level, the money helps pay for its own social programs, schools and operations. Those revenues are augmented by fund-raising appeals, earnings on endowments and investments, and bequests that can bring in millions of dollars more. The dioceses send part of their money to Rome, but only the bishops know how much.

Under the church's legal structure, most assets of a diocese are in its bishop's name and control. ''Each diocese is dramatically different in its financial condition,'' Mr. Schiltz, the law school dean, said. ''Some are extremely wealthy, with big savings and stock accounts. Others are very poor. Some dioceses issue financial statements. Others couldn't tell you what their financial system was if you asked.''

The only oversight bishops face is an obligation to make a financial report to Rome every five years. Dioceses are required to have a financial oversight board, but the bishop appoints it. While some dioceses have audited statements and even make them public, they are not required to do either. Nor must churches file financial statements with the Internal Revenue Service, as other nonprofit groups must.

Bishops also have no obligation to keep their dioceses running in the black. For years, the Archdioceses of New York, Boston and Chicago, among others, reported operating deficits running into the millions of dollars, and many still do.

Some dioceses release audited statements, while others provide only shards of data in church newsletters. The Archdiocese of Chicago, for instance, which had a budget of $996 million last year, prints only parts of its financial information in a newsletter, leaving out crucial information like the existence of a $58 million reserve endowment. Some data from Chicago show that parishes there ran a $23.3 million deficit in 2001, while other data show the archdiocese ran an $36 million surplus over all.

Though the bishops' conference declined to include financial accountability on the bishops' agenda this week in Dallas, it said it was taking steps that some donors seek.

By November, Kenneth Korotky, chief financial officer for the conference, said, it expected to issue a new manual with standardized accounting rules to all bishops. While use of the manual will be voluntary, Mr. Korotky said, ''Donors have a right to expect this.''

Mr. Butler, president of Foundations and Donors, the network of foundations that give to Catholic causes, believes that church officials did not give donors the respect they deserved. ''Major donors are depressed, shocked, demoralized, and it's reducing their giving,'' he said.

The bishops could prevent this, he said, if they hired an auditor to provide a public summary of all money paid to sexual abuse victims in the last three decades. This, Mr. Butler said, would be a first step toward preventing bishops from ''using money to silence people.''

Ms. John, the president of the Milwaukee foundation, said she was ''devastated'' to learn last month that the archdiocese there hid a $450,000 payment in 1998 to a man who had accused Archbishop Rembert G. Weakland of sexually abusing him more than two decades ago.

The archdiocese's financial statement for that year, though it was audited and included details of relatively minor expenses, made no mention of the payment.

In Palm Beach, when the second of two bishops there resigned after being accused of abusing teenage boys, the diocese appointed a lay panel to review its handling of the scandal. Last week, the diocese acknowledged having paid $923,000 to settle several sexual misconduct and harassment cases and having kept secret the embezzlement of $400,000 by its former chief financial officer.

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Outraged by such disclosures, a few prominent Catholics in Palm Beach, Milwaukee, Boston and elsewhere have threatened to organize financial boycotts of the church, while others are calling for the disclosure of more financial data.

Most, however, have sought to distinguish between giving to local parishes -- which most Catholics seem to want to continue -- and to the bishops, who have their own appeals and special collections.

''They're saying, 'I'm going to give generously to my parish, but I'm concerned about giving money to the diocese, which could be sued and the money spent on lawyers,' '' said George Ruotolo, a New Jersey businessman who leads several Catholic fund-raising drives.

Even so, bishops have many ways of controlling the parishes within their diocese, and there is no way to guarantee that the money given to parishes will not flow upward to the dioceses.

Just how the different dioceses will get the money to pay for current and future settlements remains unclear, partly because it is hard to know what assets the dioceses have in the first place. Plaintiffs' lawyers have repeatedly accused the dioceses of hiding and greatly understating their wealth.

''An archdiocese can have vast holdings, but the only ones who know that are the bishop and his lieutenants,'' said Jeffrey R. Anderson, a St. Paul lawyer who has represented abuse victims for more than 20 years.

Dioceses have only a handful of options for paying settlements. They can sell assets, seek more money from parishioners, dip into reserve funds or cut social programs.

In 1999, the Santa Rosa Diocese was faced with having to take all those steps after Bishop G. Patrick Ziemann left it $16 million in debt, after he was accused of making ill-fated investments, misappropriating church funds and making undisclosed payments to settle sexual misconduct claims.

To resolve the crisis, the 43-parish diocese was forced to cut back on ministerial programs, halt a building plan, borrow more than $6 million from other dioceses and ask parishioners to donate more.

''The ultimate impact of the lawsuits is that the people who are not responsible for the abuse end up paying for it,'' said R. Scott Appleby, director of the Cushwa Center for Catholic Studies at the University of Notre Dame. ''Programs get cut and the poor get hurt the most. ''

Of the church's assets, one of the most visible is real estate -- churches, rectories, offices and land donated by parishioners. Some dioceses have begun to move their properties into separate corporations, putting them legally beyond the reach of plaintiffs.

A few have sold or mortgaged property. Last month, Cardinal Francis E. George of the Chicago Archdiocese said he might sell his $15 million mansion, adding that the money could be used to pay abuse settlements.

In 1997, the Diocese of Dallas mortaged several vacant lots, its chancery and a building that once housed an elementary school to raise part of a $30 million sexual abuse settlement. The alternative was bankruptcy. ''That was potentially catastrophic,'' Bronson Havard, a Dallas church official, recalled.

In 1995, the Archdiocese of Santa Fe sold a retreat run by Dominican sisters and other New Mexico properties to pay what its insurance did not cover of abuse settlements estimated at more than $30 million.

For years, churches have relied on insurance to bail them out. But churches can no longer assume their liabilities will be covered. Last month, the Boston Archdiocese found that its policy would cover a third -- or less -- of the claims to 86 victims.

The Resistance of Insurers

Insurers are responding to the crisis largely by raising premiums and excluding coverage of sexual abuse by priests.

''If you say the word Catholic church to an insurance company, it's a pretty big buzzword,'' said Mr. Korotky of the bishops' conference. ''The real challenge going forward will be insurance premiums and the skyrocketing cost of them.''

Insurers can, and have, refused to pay churches in sexual misconduct cases they find are ''intentional acts'' -- behavior considered criminal in intent -- that is continual and that church officials hid.

''There is no coverage for pedophilia,'' said Michael Sean Quinn, a lawyer in Austin, Tex., who has defended churches and who teaches insurance law at the University of Texas.

That proved to be true in a 1998 case in Stockton, Calif., where a priest was accused of molesting two brothers. At least six insurers refused to pay claims under the ''intentional acts'' exclusion because they said church leaders ignored documentation that the priest was a possible threat. As a result, the diocese was forced to pay the $7.65 million settlement.

Since then, the diocese, the plaintiffs' lawyers and the insurers have continued to battle in court over further payments.

Insurers of the nation's Catholic dioceses include big carriers like Kemper and Travelers, as well as small companies that specialize in church policies.

One is Catholic Mutual Group, based in Omaha. As the clergy scandals grew this year, Timothy Wagner, the Nebraska insurance commissioner, asked his staff to review the company's finances. ''Catholic Mutual is pretty unique in that it writes policies only for Catholic churches,'' Mr. Wagner said. ''That got us to thinking.''

His examiners gave the company a clean bill of health, but they found that its liability payments rose from $1.8 million in 1998 to $6.4 million in 2001. This represents all liability claims on its church policies, including for sexual abuse.

Another insurer, National Catholic Risk Retention Group in Lisle, Ill., has also seen a rise in liability claims. Its financial statements show that losses in 2001 rose by $2.2 million, largely because of higher payouts and the need to increase reserves.

At the same time, the company doubled its financing, to $1.1 million, of a program to counter sexual misconduct. On its Web site, National Catholic said the program was intended to give priests ''a clear understanding of what constitutes an appropriate supervisory relationship'' with children and young adults.

Neither National Catholic nor Catholic Mutual would comment on their business. A spokesman for a third large carrier of church insurance, Arthur J. Gallagher & Company, would say only, ''It's too volatile a situation now -- we're too close to the flame.''

John Andre, a spokesman for A. M. Best, the insurance ratings agency, said, ''With most insurance, you can approximate what are future losses.''

''But with this, there is a perceived lack of control by the church,'' he said. ''It's hard for insurance companies to get their hands around their potential exposure, except to know it could be considerable.''

Correction: June 19, 2002, Wednesday An article on Thursday about scrutiny of the finances of the Catholic Church in the United States referred incorrectly to the availability of information from the Archdiocese of Chicago about its $58 million reserve endowment. The fund was indeed included in a budget statement last year, under the heading ''pastoral center savings'' in the archdiocese's newsletter. It was not omitted.